What: Shares of fuel cell systems developer Plug Power (PLUG -2.57%) sank $0.02, or less than 1%, to close at $2.59 in Wednesday's trading session following the release of its fourth-quarter results on Tuesday and a subsequent price target cut by Roth Capital on Wednesday.
So what: Before the market opened on Wednesday, Roth Capital covering analyst Matt Koranda cut the cord on Plug Power's price target by 35% -- to $2.60 from $4 – but his kept neutral rating on the company. Koranda's new price target suggests Plug Power is essentially trading at fair value right now.
In Koranda's research note to investors, he applauded Plug Power's growing backlog, which has crested the $150 million mark, as well as its rapid growth of shipments of its GenDrive hydrogen fuel cell-powered forklifts. Koranda also praised Plug Power's management's progress in focusing on its niche hydrogen fuel cell business.
However, Koranda had trouble looking past Plug Power's wider-than-expected net loss in the fourth quarter, which was highlighted by rapidly rising expenses. Koranda noted that Plug Power's gross margin shrank for the second consecutive quarter, and he questioned the company's ability to improve upon its margins and adjusted EBITDA in the near term. In short, Koranda would just as soon wait on the sidelines until Plug Power's bottom line does the talking.
For those who might have missed its quarterly report, Plug Power reported $21.5 million in revenue, up from just $8 million in fourth-quarter 2013; its adjusted net loss totaled $13.3 million, or $0.08 per share, up from an adjusted net loss of $8 million, or $0.08 per share, in the year-ago quarter. Although its adjusted net loss was the same year over year, Wall Street had expected a narrower $0.04 per-share loss.
Now what: The real question for investors is whether this niche alternative energy solutions provider deserves an additional premium over what Roth Capital's analyst is suggesting.
On one hand, Plug Power has struck deals involving its GenDrive fuel cell technology with some key partners, including Wal-Mart and Kroger. The more well-known large businesses that Plug Power can land deals with, the more the corporate world and Wall Street will consider taking the product seriously. With a reasonable $150 million backlog, Plug Power has undeniably demonstrated there's genuine interest in its product -- especially since it could help businesses save on long-term fuel costs.
But expenses and margins have always been Plug Power's issue. It has now missed Wall Street's consensus net loss estimate in five of the past six quarters and doesn't appear to have a clear path to anything significantly beyond break-even results. Although that doesn't mean Plug Power is a bad company, it could mean that paying $450 million in market value for it is crazy.
My personal feeling is to avoid the company until it has made some serious strides in controlling costs. Alternative energy solutions might be the future, but that's only if they're sustainably profitable. Plug Power hasn't shown me that it has the ability yet to scale its product profitably over the long term. I'd love to see that happen, but I don't believe investors need to rush into Plug Power's shares just yet.